Grantham: ‘Most Important U.S. Financial Crisis Since World War Two’
Jeremy Grantham, chairman of global investment management firm Grantham, Mayo, Van Otterloo & Co. and overseer of $157 billion, had a stark warning for Bloomberg readers Wednesday (much obliged, Financial Armageddon). He warned, “This is the most important U.S. financial crisis since World War II.” The crisis stems from a global credit crunch brought on by the U.S. housing slowdown and ensuing subprime debacle. As a result, Grantham said that the U.S. economy is likely to enter a recession. He added that present conditions are worse than the savings and loan crisis of the eighties, which cost U.S. taxpayers more than $160 billion. The money manager explained:
The S&L crisis was parochial in comparison. This is the first one that is global; it has tentacles everywhere.
Furthermore, Grantham said credit problems are likely to spread beyond subprime mortgages to commercial real-estate loans and debt used to finance private equity transactions. As quoted by Bloomberg:
Private-equity deals will be in trouble. They were under-researched and overleveraged, and we had reached a level where the junkiest possible companies were selling at high prices.
Grantham wrote in his latest quarterly letter to investors that private equity “is the most underappreciated risk of all and is likely to be the center of another phase in the crisis.”
Because of the crisis, the head of the Boston-based firm told Bloomberg readers to shun stocks and switch to cash. From his Boston office, Grantham warned:
Don’t be a hero. Move to cash and let the other guys fish around for the bargains in the wreckage.
“Don’t be that guy!”
The 69-year-old money manager said he expects stocks to reach a bottom in 2010.
Grantham correctly predicted the crash in technology stocks two months before the bubble burst in March 2000. Back on June 13, 2007, I talked about the legendary value investor, who wrote to shareholders back then that we are now witnessing the first global bubble in history, covering all asset classes. He said:
From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!
The value investor added:
Sphere: Related ContentEveryone, everywhere is reinforcing one another. Wherever you travel you will hear it confirmed that “they don’t make any more land,” and that “with these growth rates and low interest rates, equity markets must keep rising,” and “private equity will continue to drive the markets.”
January 27th, 2008 at 12:21 pm
LOL, ‘don’t be me’ might be more convincing.
January 27th, 2008 at 2:28 pm
“Captain Chaos” is actually actor Dom DeLuise from the Cannonball Run movie series:
January 27th, 2008 at 5:05 pm
I’m not sure… this seems a little extreme to me. Certainly, it’s concerning that this financial crisis is global, but I don’t think it’s going to be the end of the world. If it hits China’s economy hard, though, it could be a different story.
January 28th, 2008 at 12:04 am
Thanks for the comment Inquisitor. Grantham’s assessment of where the U.S. economy is heading sounds absolutely miserable. I don’t think it’s going to be the end of the world either. However, I do pay attention to Mr. Grantham’s views due to the fact that he not only predicted the crash in technology stocks, but that he is also the investment manager of Vice President Dick Cheney and former U.S. presidential candidate John F. Kerry.
Regarding China, well, let’s just say I’m not totally sold on the theory of decoupling just yet. However, China has other things to worry about right now, like a red-hot stock market that seems out of whack.